Yesterday, the fiber started plunging 1 hour into the London session and the decline continues until the European session ended. The greater-than-200 pips move wiped out the gains that the pair has been accumulating for the past three trading days. Looking back at the past 2 weeks, EURUSD was mainly just ranging between 1.0510 and 1.0770. A breakout to either side hasn’t taken place just yet, but the upcoming ECB rates decision might inject some more volatility and provide the pair with a little more directional bias.
Well, then what are the fundamentals that are at play here?
Euro weakened against the greenback as the demand for defensive currencies soared due to uncertainties in the banking and financial system in general. Expectations were for the ECB to raise rates by 50bps to contain inflation.
However, sentiment turned dovish when market participants take the recent financial incident into consideration. ECB might just raise 25bps and if that does happen, EUR might take a hit and continue to slide against USD. 1.0510 may be easily broken then, and the next target area will be close to 1.0350.
As for USD, the expected terminal rate — which surpassed 5.5% less than a week ago — slid to about 4.85%, with stress in the global banking system set to challenge the Fed’s resolve to raise rates further to manage inflation.
The Yen continued to gain against the greenback after a fallout from the rising channel. Right when London session began yesterday the pair started to fall and the sellers are still holding their ground right now.
Adding into the mix was the BOJ meeting minutes where the feasibility of tweaking the yield curve control was being discussed. In the end, the central bank aims to proceed cautiously in assessing the consequences of potential modifications. Since the newly appointed Governor expressed only dovish views, we are now considering a reversal to the upside after a bounce off the 131.000 key support.
With that being said, our preference remains bearish in the short term until the pair reach the aforementioned key support area.
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